Monday, April 4, 2011

Northern Oil versus Brigham Exploration Company

Someone in the comments asked me why I was short Northern Oil versus (say) Brigham Exploration Company. Brigham is another highly valued Bakken play. Yahoo reports Brigham as having a 97 times PE ratio.

Northern Oil is – as previous posts have made clear – not an exploration and production company. It buys acreage and it participates in wells drilled by other people on that acreage. Its only skill – its only reason for existence – is choosing which acres to buy and managing their ownership position. That is why it manages to be a $1.6 billion company with only 11 staff. The staff don't do anything except buy and manage an acreage ownership position.

The following table illustrates first quarter 2011 completions in which Northern Oil has participated with a working interest.

WELL NAME

OPERATOR

COUNTY/STATE

WI

IP/BOEPD *

JEANIE 25-36 #2H

URSA

MCKENZIE, ND

54.58%

1,185

HOVDEN FEDERAL #1-20H

SINCLAIR

DUNN, ND

45.72%

1,325

BORSETH #15-22 1H

URSA

MCKENZIE, ND

39.55%

2,015

BANDIT #2-29H

SLAWSON

MOUNTRAIL, ND

26.25%

959

NIELSEN #1-12H

CONTINENTAL

DIVIDE, ND

24.25%

857

VONA #1-13H

CONTINENTAL

DIVIDE, ND

20.31%

921

ERNEST SCHARCHENKO #34-33H

MARATHON

DUNN, ND

17.57%

400

MUSKRAT FEDERAL #1-28-33H

SLAWSON

MOUNTRAIL, ND

12.83%

1,453

ZI PAYETTE #10-15H

ZENERGY

MCKENZIE, ND

12.50%

1,323

HOLTE #1-32H

CONTINENTAL

WILLIAMS, ND

12.50%

933

GEORGE TANK #151-96-10C-3-3H

PETRO HUNT

MCKENZIE, ND

12.35%

902

ALMER 31X-6

XTO

WILLIAMS, ND

11.14%

388

BROWN 30-19 #1H

BRIGHAM

MOUNTRAIL, ND

9.25%

2,240

2

CROWFOOT #35-3031H

EOG

MOUNTRAIL, ND

8.38%

330

COWDEN #5404 13-35H

OASIS

WILLIAMS, ND

7.65%

1,594

EN-HEINLE #156-94-2536H-3

HESS

MOUNTRAIL, ND

7.29%

950

VIXEN FEDERAL #1-19-30H

SLAWSON

MOUNTRAIL, ND

6.70%

2,218

HELEN 11X-05

XTO

WILLIAMS, ND

6.64%

917

BENNY #1-13H

CONTINENTAL

RICHLAND, MT

6.25%

232

NORWAY #1-5H

CONTINENTAL

MCKENZIE, ND

5.14%

1,429

ROUND PRAIRIE #10-1819H

EOG

WILLIAMS, ND

4.82%

1,900

MILLER #44-11H

WHITING

WILLIAMS, ND

4.12%

1,144

BUD #1-19H

CONTINENTAL

WILLIAMS, ND

3.70%

1,983

KOSTELECKY 31-6H

FIDELITY

STARK, ND

3.60%

1,343

PROWLER #2-16

SLAWSON

MOUNTRAIL, ND

3.44%

1,145

HODENFIELD #15-23H

AMERICAN

WILLIAMS, ND

2.38%

1,400

EN-TRINITY #154-93-2833H-1

HESS

MOUNTRAIL, ND

2.28%

750

MCD #11-29H

FIDELITY

MOUNTRAIL, ND

2.08%

430

PAYARA # 2-21H

SLAWSON

MOUNTRAIL, ND

2.03%

1,148

MUIR #1-7H

CONTINENTAL

DIVIDE, ND

1.75%

671

MICHAEL STATE 31X-16

XTO

WILLIAMS, ND

1.19%

271

OUKROP #34-34H

FIDELITY

STARK, ND

1.17%

262

CLEARWATER #23-3025H

EOG

MOUNTRAIL, ND

1.08%

250

LYNN #19-20-29H

FIDELITY

MOUNTRAIL, ND

0.81%

1,251

SATTERTHWAITE #43-1H

WHITING

MOUNTRAIL, ND

0.70%

1,478

EN-WILL TRUST B #157-94-2635H-3

HESS

MOUNTRAIL, ND

0.54%

320

FORT BERTHHOLD #152-94-13B-24-1H

PETRO HUNT

MCKENZIE, ND

0.52%

1,135

_____________

There are a bunch of things to notice. Every single well is in North Dakota. That is not surprising - the "sweet spot" in the Bakken is in North Dakota. We know that Northern has been buying its large acreage in Montana and buying small plots in North Dakota - but all the drilling is on those small plots. (The large Montana acreage might one day be valuable but they paid not very much for it - and as far as the current drilling is concerned the Montana positions only pad the acreage numbers.)

The second thing to note is how variable these wells are. Only three wells have an initial flow of above 2000 barrels per day. Ten wells have an initial flow below 500 barrels per day.

The third thing to note is that - as per all Northern releases - no decline data is given.

Lets contrast this to Brigham Exploration (BEXP) who have published a summary of their Williston Basin North Dakota results. BEXP averages greater than 2850 barrels per day initial flow. The average of Brigham is above the highest achieved by Northern Oil. Brigham has multiple wells that flowed above 5000 barrels per day initially.

Moreover Brigham does not have a single well with an initial flow below 1000 barrels per day.

Further Brigham published flow rates averaged over the first 30 days and the first 60 days. Declines are massive. Initial flows averaged 2858 barrels per day. Average of the first 60 days is 826 barrels of oil per day and those averages include very high initial flows.

Whatever: it is clear that Brigham's results are much much better than Northern and that Brigham deserves a premium valuation. All things equal these results suggest that Northern's acreage position is inferior to Brigham despite Northern being entirely focussed on acreage.

Decline rates are massive at Brigham - albeit from high initial flows. We do not know the decline rates at Northern but the initial flows are much lower.

John

A postscript is warranted. Brigham Exploration was acquired. It was a good call...

Keep digging on the Northern Oil team. The mgm't are a couple of daddy's boys from Wall Street that know squat about oil or exploration. More like snake oil salesman. surprised they did not get into uranium like the Vancouver crowd

you need to talk with oil and gas ppl before posting comments on the "results" of oil and gas companies. The only statistic that counts for these operators is their 3 month cumulative production.

Initial production numbers can be exaggerated very easily. First reporting numbers too early can include down hole frac fluids, not all production oil. To complete a multistage frac you need 800-1200 tonnes of fluid (5 years ago, an 80 ton frac was large) this fluid is pumped into the reservoir at a pressure greater than the normal pressure of the reservoir. therefore when you produce the wells most of the initial production is frac fluids mixed with oil. this can take several months to be completely clean.

Bringham is not more advanced than every operator, because they are using the same equipment, granted they may have a better team, but my guess is they are gaming their results.

from a long investment perspective there are few competitive advantages in oil and gas companies. probably the biggest one is land base and how much they paid for it. you can hire good services companies with the best technologies to complete wells or drill wells. you can JV with good management teams, to better exploit the land base, but it is impossible to recreate a cheap land base. Look at Cenovus in Alberta, they have an 80 year RLI. Most companies are lucky to have 13-15. So their massive resource base was acquired very cheaply many years ago.

I don't own northern or brigham, but i don't think your hypothesis of comparing some crappy stats numbers makes you a good hedge fund manager.

Now your comments on bad management is probably your single best point. but i would look at their F&D #s, and opex numbers, before looking at IP numbers.

As a capitalist if i could run a big operation, lowering my capital requirements and keep SG&A low that would be great. But if management is self enriching, then it will be a bad investment.

read your other posts, they are self dealing. they buy the acreage themselves and then sell it to corporation at bigger prices, issue stock for land along the way.

i don't mind the model, not the best, but when you do it through dilutive share issues, texting mssging (wtf?) and supposedly the most capitalistic 23 year old (according to his sister), not so sure you make money in the end. Most plays are non homogeneous, meaning all land is not created equal.

In oil and gas, if it is cheap like dirt, it is dirt. If these guys had bought the rights in say 1950, or even 2004, then i would buy it more, but if you think you are making suckers of people who are in teh game right now. nope. maybe on a couple transactions. remember the scene in "there will be blood", when the preacher revisits daniel day lewis to sell him more land. he beats him with a bowling pin cause the land was worthless...

John,I am interested by your response to NOG hiring Deloitte as their auditor. Timing is convenient, as Deloitte won't have to sign off on a 10-K for nearly a year. I guess there are two ways to look at it: either they are legitimate and want an auditor to reflect their new-found size/status, or they are a fraud and are opportunistically hiring a big name who won't end up signing off on their accounts, but in the meantime Deloitte's brand will support the stock price until that date arrives (playing from the Chinese RTO handbook).

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